Itaú BBA - Itaú Inflationary Surprise Index - Upward surprises in Mexico, mixed releases in Brazil

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Itaú Inflationary Surprise Index - Upward surprises in Mexico, mixed releases in Brazil

September 5, 2017

After four consecutive months of declines, the Brazilian surprise indicator increased in August.

Our Itaú Inflationary Surprise Index rose to -0.26 in August, coming from -0.36 in July. The Mexican surprise index stood flat in August, as tradable goods disinflation has proven slower than anticipated by the market and the non-core food component stayed high. After four consecutive months of declines, the Brazilian surprise indicator increased in August. The country’s inflation indexes registered mixed surprises in the month, but underlying inflation remains low. In Chile, CPI came in a tad above median market projections, whereas in Colombia inflation fell short of the most optimistic forecast.

The inflation surprise index compares trends in inflation indicators released during the month to what analysts had been expecting for them. The inflation index is a GDP-weighted average of separate indices for Brazil, Mexico, Chile, Colombia and Peru. The inflation index, however, possesses fewer indicators for each country (vis-à-vis our proprietary Activity Surprise Indexes) due to the limited number of inflation indices that are consistently forecasted by agents. As usual, an above-zero reading means inflation overshot estimates. A below zero reading means inflation came in lower than expected. The index is presented as a three-month moving average in order to avoid excess volatility.

Brazil’s index increased to -0.46 in August, coming from -0.64 in July. July’s IPCA came a tad higher than expectations (0.24% month-over-month vs. 0.18%). The housing group, particularly electricity bills, provided the largest upward contribution in July, owing to the activation of the yellow mode in the tariff flag system and tariff adjustments by some utility companies. On the other hand, the August inflation preview (IPCA-15) printed at 0.35% month-over-month (5bps below the median forecast). The annual IPCA-15 figure slowed down to 2.68% (the lowest reading since March 1999), with food and beverages providing noteworthy downward contribution in August. All in all, underlying inflation trends remains benign. In fact, service inflation, an item of special interest to the BCB, maintained the recent pace of decline, reflecting the strong idleness observed in the labor market, despite recent positive unemployment surprises.

Mexico’s index stood afloat at 0.41 in August, amid widespread upward inflation surprises. July’s CPI posted a 0.38% monthly variation, surprising median market expectations (0.32%, as per Bloomberg) to the upside. Likewise, CPI inflation in the first half of August surpassed market expectations: the bi-weekly inflation came at 0.31%, while the consensus projected 0.22%. The main source of the pressure was core goods (tradables), which accounted for almost half of the CPI inflation print. In light of the slower-than-expected disinflation for tradables and the still-pressured non-core food component, we have increased our yearend inflation projection to 5.7% (5.4%, previously).

Chile’s index increased to -0.48 in August, coming from -0.61 in July. Consumer prices increased 0.2% from June to July, slightly above the Bloomberg market consensus of 0.1%. Looking forward, subdued growth and a stable exchange rate, combined with well-anchored inflation expectations, will keep inflationary pressures at bay. We expect inflation to remain low for the remainder of the year, ending the year at 2.4%.

Colombia’s index fell to -0.62 in August, coming from -0.17 in the previous month. The 0.05% monthly deflation registered in July came in below the most optimistic forecast (median: +0.11%). This better-than-expected figure, alongside favorable base effects, led annual inflation to 3.40% - the lowest since October 2014. Nevertheless, the behavior of non-tradable items suggests inertia prevails. We see annual inflation resuming an upward trend in August, ending the year at 4.2%.

Peru’s index rose to -0.79 in August, coming from the 6-year low reached on July (-1.31). After a string of sequential deflation readings, CPI accelerated to 0.20% in July – a tad above the median of analysts’ expectations (0.17%). Looking ahead, the fall of agricultural prices (stemming from the reversion El Niño), weak domestic demand, and the lagged effects of the PEN appreciation will contribute to disinflation; we expect annual inflation to decelerate to 2.6% by yearend.

Methodology Note

Our Itaú Inflationary Surprise Index compares trends in inflation indicators to what analysts had been expecting for them each month. The index considers the month that each indicator is released. For instance, February’s inflation reading released in March will be incorporated to March’s surprise index.

The index is a GDP-weighted average of separate indeces for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means inflation overshot estimates. Below zero means inflation came in below expectations. The index is a three-month average in order to avoid excess volatility.

We build the inflation surprise index for each country using inflation indicators for which consensus estimates are normally provided in the Bloomberg survey. The weight of each indicator in the index depends on its importance for the economy. For example, headline consumer inflation numbers enjoy a higher weight than regional inflation indicators or wholesale price indices.

We use the deviation of the actual print from the consensus estimate (surprise), subtract the result from the historical average deviation and then divide the result by the standard deviation of the surprise. This methodology provides a better sense of how important was the surprise in each month.

The weight of each country in the aggregate inflation index depends on the size of its GDP. Brazil has the highest weight, followed by Mexico.

It’s worth noting that, due to revisions in the economic indicators and as lagged announcements, the surprise indices may be revised.

 

Indicators on which the index is built:

Brazil: IPCA (Headline CPI) (30%), IPCA-15 (30%), IGP-10 (10%), IGP-M (10%), IGP-DI (10%), IPC-S (5%), IPC-FIPE (5%)

Mexico: Headline CPI (50%), Bi-Weekly CPI (50%)

Chile: Headline CPI (100%)

Colombia: Headline CPI (100%)

Peru: Headline CPI (100%)


 

Luka Barbosa
Eduardo Marza


 

 



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